RP lending rate is second highest in Asia as of June

MANILA, Philippines – The real lending rate in the Philippines went up in the second quarter due to the continued decline in the inflation rate amid the steady nominal bank lending rates, the Bangko Sentral ng Pilipinas (BSP) reported over the weekend.

The BSP said the country ranked second in the list of Asian countries with high lending rates with 3.9 percent, next to Indonesia’s 7.5 percent as of June this year. Real lending rate of the Philippines stood at 3.2 percent in March, ranking the country fifth in the list of countries with high real lending rates.

Real lending rate is measured as the difference between the average bank lending rate and inflation.

“The real lending rate of the Philippines ranked second highest (from fifth highest in March 2010) in a sample of 10 Asian countries,” the BSP stressed.

Inflation averaged 4.2 percent in the first seven months of the year from 4.3 percent in the same period last year. For the month of July, inflation was steady at 3.9 percent as higher food prices were offset by lower pump prices of petroleum products as well as cheaper power and water bills.

Last July 15, the central bank’s Monetary Board decided to further lower its inflation forecast to four percent, instead of 4.7 percent this year, and to three percent, instead of 3.6 percent next year, in light of the reduction of power costs, lower oil prices, steady commodity prices, and lower than expected inflation for the month of May and June.

However, authorities expect inflation to average about 4.37 percent this year and 4.24 percent next year if the upside risks, including higher rice prices with the removal of the subsidy extended to ailing National Food Authority (NFA), the increase in toll fees in the North and South Luzon expressways, and fare hike of MRT and LRT, are factored in.

The BSP has set an inflation target of 3.5 percent to 5.5 percent this year and three percent to five percent between 2011 and 2014.

BSP Governor Amando Tetangco Jr. said inflation last month was unchanged as higher food prices were offset by cheaper utility rates, giving the central bank more elbow room to keep its policy stance unchanged.

“The inflation rate for July remained unchanged at 3.9 percent as reported by NSO, higher growth rates for certain food items were offset by slower increments in utilities, steady inflation for this month continues to support our view of a within-target full year inflation, which backs up the assessment that current policy stance remains appropriate,” Tetangco stressed.

The BSP has kept its key policy rates at record lows since July last year but has lifted almost all of the liquidity enhancing measures adopted since November 2008 to cushion the impact of the global financial crisis on the domestic economy.

It would be recalled that the Monetary Board decided to slash its key policy rates by 200 basis points between December 2008 to July 2009 as part of its accommodative stance to cushion the impact of the global economic meltdown. This brought the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent.

Crisis-related measures that were tweaked included the increase in the rate on a short-term lending facility to 4.0 percent from 3.5 percent; the reduction of the peso rediscounting budget to P40 billion and further to pre-crisis level of P20 billion from P60 billion; the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument; and the restoration the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points.

However, monetary authorities decided to maintain the reserve requirements for banks. As part of its liquidity enhancing measures to cushion the impact of the global financial meltdown in 2008, the BSP slashed the reserve requirement of banks to 19 percent from 21 percent to release more liquidity into the financial system. –Lawrence Agcaoili (The Philippine Star)